*China’s estimated economy by the year 2040. Be warned.
BY ROBERT FOGEL | JANUARY/FEBRUARY 2010

In 2040, the Chinese economy will reach $123 trillion, or nearly three times the economic output of the entire globe in 2000. China's per capita income will hit $85,000, more than double the forecast for the European Union, and also much higher than that of India and Japan. In other words, the average Chinese megacity dweller will be living twice as well as the average Frenchman when China goes from a poor country in 2000 to a superrich country in 2040. Although it will not have overtaken the United States in per capita wealth, according to my forecasts, China's share of global GDP -- 40 percent -- will dwarf that of the United States (14 percent) and the European Union (5 percent) 30 years from now. This is what economic hegemony will look like.

Most accounts of China's economic ascent offer little but vague or threatening generalities, and they usually grossly underestimate the extent of the rise -- and how fast it's coming. (For instance, a recent study by the Carnegie Endowment for International Peace predicts that by 2050, China's economy will be just 20 percent larger than that of the United States.) Such accounts fail to fully credit the forces at work behind China's recent success or understand how those trends will shape the future. Even China's own economic data in some ways actually underestimate economic outputs.

It's the same story with the relative decline of a Europe plagued by falling fertility as its era of global economic clout finally ends. Here, too, the trajectory will be more sudden and stark than most reporting suggests. Europe's low birthrate and its muted consumerism mean its contribution to global GDP will tumble to a quarter of its current share within 30 years. At that point, the economy of the 15 earliest EU countries combined will be an eighth the size of China's.

Think Again: Asia's Rise
Don't believe the hype about the decline of America and the dawn of a new Asian age. By Minxin Pei
This is what the future will look like in a generation. It's coming sooner than we think.

What, precisely, does China have going so right for it?

The first essential factor that is often overlooked: the enormous investment China is making in education. More educated workers are much more productive workers. (As I have reported elsewhere, U.S. data indicate that college-educated workers are three times as productive, and a high school graduate is 1.8 times as productive, as a worker with less than a ninth-grade education.) In China, high school and college enrollments are rising steeply due to significant state investment. In 1998, then-President Jiang Zemin called for a massive increase in enrollment in higher education. At the time, just 3.4 million students were enrolled in China's colleges and universities. The response was swift: Over the next four years, enrollment in higher education increased 165 percent, and the number of Chinese studying abroad rose 152 percent. Between 2000 and 2004, university enrollment continued to rise steeply, by about 50 percent. I forecast that China will be able to increase its high school enrollment rate to the neighborhood of 100 percent and the college rate to about 50 percent over the next generation, which would by itself add more than 6 percentage points to the country's annual economic growth rate. These targets for higher education are not out of reach. It should be remembered that several Western European countries saw college enrollment rates climb from about 25 to 50 percent in just the last two decades of the 20th century.

And it's not just individual workers whose productivity jumps significantly as a result of more education; it's true of firms as well, according to work by economist Edwin Mansfield. In a remarkable 1971 study, Mansfield found that the presidents of companies that have been early adopters of complex new technologies were on average younger and better educated than heads of firms that were slower to innovate.

The second thing many underestimate when making projections for China's economy is the continued role of the rural sector. When we imagine the future, we tend to picture Shanghai high-rises and Guangdong factories, but changes afoot in the Chinese countryside have made it an underappreciated economic engine. In analyzing economic growth, it is useful to divide an economy into three sectors: agriculture, services, and industry. Over the quarter-century between 1978 and 2003, the growth of labor productivity in China has been high in each of these sectors, averaging about 6 percent annually. The level of output per worker has been much higher in industry and services, and those sectors have received the most analysis and attention. (I estimate that China's rapid urbanization, which shifts workers to industry and services, added 3 percentage points to the annual national growth rate.) However, productivity is increasing even for those who remain in rural areas. In 2009, about 55 percent of China's population, or 700 million people, still lived in the countryside. That large rural sector is responsible for about a third of Chinese economic growth today, and it will not disappear in the next 30 years.

Third, though it's a common refrain that Chinese data are flawed or deliberately inflated in key ways, Chinese statisticians may well be underestimating economic progress. This is especially true in the service sector because small firms often don't report their numbers to the government and officials often fail to adequately account for improvements in the quality of output. In the United States as well as China, official estimates of GDP badly underestimate national growth if they do not take into account improvements in services such as education and health care. (Most great advances in these areas aren't fully counted in GDP because the values of these sectors are measured by inputs instead of by output. An hour of a doctor's time is considered no more valuable today than an hour of a doctor's time was before the age of antibiotics and modern surgery.) Other countries have a similar national accounting problem, but the rapid growth of China's service sector makes the underestimation more pronounced.

Fourth, and most surprising to some, the Chinese political system is likely not what you think. Although outside observers often assume that Beijing is always at the helm, most economic reforms, including the most successful ones, have been locally driven and overseen. And though China most certainly is not an open democracy, there's more criticism and debate in upper echelons of policymaking than many realize. Unchecked mandates can of course lead to disaster, but there's a reason Beijing has avoided any repeats of the Great Leap Forward in recent years.

For instance, there is an annual meeting of Chinese economists called the Chinese Economists Society. I have participated in many of them. There are people in attendance who are very critical of the Chinese government -- and very openly so. Of course, they are not going to say "down with Hu Jintao," but they may point out that the latest decision by the finance ministry is flawed or raise concerns about a proposed adjustment to the prices of electricity and coal, or call attention to issues of equity. They might even publish a critical letter in a Beijing newspaper. Then the Chinese finance minister might actually call them up and say: "Will you get some of your people together? We would like to have some of our people meet with you and find out more about what you are thinking." Many people don't realize such back-and-forth occurs in Beijing. In this sense, Chinese economic planning has become much more responsive and open to new ideas than it was in the past.

Finally, people don't give enough credit to China's long-repressed consumerist tendencies. In many ways, China is the most capitalist country in the world right now. In the big Chinese cities, living standards and per capita income are at the level of countries the World Bank would deem "high middle income," already higher, for example, than that of the Czech Republic. In those cities there is already a high standard of living, and even alongside the vaunted Chinese propensity for saving, a clear and growing affinity for acquiring clothes, electronics, fast food, automobiles -- all a glimpse into China's future. Indeed, the government has made the judgment that increasing domestic consumption will be critical to China's economy, and a host of domestic policies now aim to increase Chinese consumers' appetite for acquisitions.

And Europe? Europe, by which I mean the 15 earliest EU members, faces twin challenges of demography and culture, its economic future burdened by a mix of reproductive habits and consumer restraint.

Europeans, of course, won't be eating grass in 2040. Their economic decline over the next 30 years will be relative, not absolute, as technological advances and other factors should allow Europe's overall labor productivity to continue to grow about 1.8 percent annually. Yet their percentage contribution to global GDP will tumble, shrinking by a factor of four, from 21 percent to 5 percent, in a generation.

Demography is the first key issue. The population of Western European countries has been aging rapidly, and that is likely to continue over the next several decades. The basic reason: European couples aren't producing enough babies. Europe's total fertility rate has been below the level needed to replace the population for about 34 years, according to a 2005 Rand Corp. study. As a result, the percentage of women of childbearing age will decline, in the earliest 15 EU countries, from about 50 percent in 2000 (it was also about 50 percent in 1950) to the U.N. projection of about 35 percent in 2040. So we have a double whammy: Not only will reproductive-age women have sharply reduced fertility rates, but the proportion of women who are in their childbearing years will also have declined sharply. By 2040, almost a third of Western Europe's population may be over age 65.

Why are there fewer babies? One key reason is that European attitudes toward sex have evolved sharply. One-hundred fifty years ago, it was considered a sin to enjoy sex, the only legitimate purpose for which was procreation. But today, young women believe that sex is mainly a recreational activity. Behind the fertility trend is a vast cultural shift from the generation that fought in World War II, which married early and produced the great baby boom of 1945 to 1965. The easy availability of birth control and the rise of sex as recreation mean that populations are likely to shrink in many European countries. As early as 2000, the natural rate of increase (births minus deaths) was already negative in Germany and Italy. By 2040, it is likely that the natural increase will be negative in the five largest European countries, except Britain.

So what if Europeans have a little fun now and then? Well, fun has consequences. Declining fertility pushes up the age of the citizenry and shrinks the percentage of people in the workforce, and so impedes growth. Demographic changes also shape the hiring and promotion structures of individual companies, and not necessarily for the better; if the elderly cling to the best jobs well past retirement age, younger workers may have to wait an extra decade, perhaps longer, to get their turn. And because younger workers are a major source of new ideas, slowing down the ascendancy of the next generation may retard the pace of technological change. (If fertility rates remain as low as they have been, Italy's population will fall by half in 50 years. Naturally, politicians are doing everything they can. They are joining with the Holy See and telling young women: Please procreate.)

In another way, Europe's culture confounds economists. Citizens of Europe's wealthy countries are not working longer hours to make higher salaries and accumulate more goods. Rather, European culture continues to prize long vacations, early retirements, and shorter work weeks over acquiring more stuff, at least in comparison to many other developed countries, such as the United States. In my observation, those living in most Western European countries appear to be more content than Americans with the kind of commodities they already have, for example, not aspiring to own more TVs per household. Set aside whether that's virtuous. A promenade in the Jardin du Luxembourg, as opposed to a trip to Walmart for a flat-screen TV, won't help the European Union's GDP growth.

Of course, China faces its own demographic nightmares, and skeptics point to many obstacles that could derail the Chinese bullet train over the next 30 years: rising income inequality, potential social unrest, territorial disputes, fuel scarcity, water shortages, environmental pollution, and a still-rickety banking system. Although the critics have a point, these concerns are no secret to China's leaders; in recent years, Beijing has proven quite adept in tackling problems it has set out to address. Moreover, history seems to be moving in the right direction for China. The most tumultuous local dispute, over Taiwan's sovereignty, now appears to be headed toward a resolution. And at home, the government's increasing sensitivity to public opinion, combined with improving living standards, has resulted in a level of popular confidence in the government that, in my opinion, makes major political instability unlikely.

Could Europe surprise us by growing substantially more than I have predicted? It seems farfetched, but it could happen, either by Europeans curtailing vacations and siesta time to adopt a more workaholic ethos, or by more young women and their partners aligning their views of sex more closely with those of the pope than those of movie stars. Anything's possible, but don't bet on it -- Europeans seem to like their lifestyles just fine, and they've long since given up their dreams of world domination. An unexpected technological breakthrough could also shake things up, though this isn't the sort of thing economists can base predictions on.

To the West, the notion of a world in which the center of global economic gravity lies in Asia may seem unimaginable. But it wouldn't be the first time. As China scholars, who take a long view of history, often point out, China was the world's largest economy for much of the last two millennia. (Chris Patten, the last British governor of Hong Kong, reckons China has been the globe's top economy for 18 of the past 20 centuries.) While Europe was fumbling in the Dark Ages and fighting disastrous religious wars, China cultivated the highest standards of living in the world. Today, the notion of a rising China is, in Chinese eyes, merely a return to the status quo.

Third, though it's a common refrain that Chinese data are flawed or deliberately inflated in key ways, Chinese statisticians may well be underestimating economic progress. This is especially true in the service sector because small firms often don't report their numbers to the government and officials often fail to adequately account for improvements in the quality of output. In the United States as well as China, official estimates of GDP badly underestimate national growth if they do not take into account improvements in services such as education and health care. (Most great advances in these areas aren't fully counted in GDP because the values of these sectors are measured by inputs instead of by output. An hour of a doctor's time is considered no more valuable today than an hour of a doctor's time was before the age of antibiotics and modern surgery.) Other countries have a similar national accounting problem, but the rapid growth of China's service sector makes the underestimation more pronounced.

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China's underestimations have frequently been based on 'revaluations' of the value of the black market. A characteristic present in all economies. The fact that these 'revaluations' have occurred is indicative of a regular 'display of expansion'- to ensure foreign investors that all is well. Moreover, they have crucially occurred at times when global markets have witnessed a downturn and the flow of foreign investment has threatened to abate, a factor that only we, 'skeptics' seem not to miss.

Fourth, and most surprising to some, the Chinese political system is likely not what you think. Although outside observers often assume that Beijing is always at the helm, most economic reforms, including the most successful ones, have been locally driven and overseen. And though China most certainly is not an open democracy, there's more criticism and debate in upper echelons of policymaking than many realize. Unchecked mandates can of course lead to disaster, but there's a reason Beijing has avoided any repeats of the Great Leap Forward in recent years.

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Beijing has been at the helm of every single economic reform: from the fiscal decentralization reforms of the 1980's, to the fiscal contract systems (caizheng baogan) under a variety of fiscal regimes signed with the provinces, to the readjustment of provincial tax-sharing rates and the appropriation of lucrative provincial industries, to the centralized distribution of provincial quotas for national bonds to the Tax Sharing Agreement of 1994 and the concept of EBR or local Extra Budgetary revenues (Watch out for my essay on Chinese fiscal reforms soon). Take that from someone who has studied Chinese economic history in depth.

To the West, the notion of a world in which the center of global economic gravity lies in Asia may seem unimaginable. But it wouldn't be the first time. As China scholars, who take a long view of history, often point out, China was the world's largest economy for much of the last two millennia. (Chris Patten, the last British governor of Hong Kong, reckons China has been the globe's top economy for 18 of the past 20 centuries.) While Europe was fumbling in the Dark Ages and fighting disastrous religious wars, China cultivated the highest standards of living in the world. Today, the notion of a rising China is, in Chinese eyes, merely a return to the status quo.

In another way, Europe's culture confounds economists. Citizens of Europe's wealthy countries are not working longer hours to make higher salaries and accumulate more goods. Rather, European culture continues to prize long vacations, early retirements, and shorter work weeks over acquiring more stuff, at least in comparison to many other developed countries, such as the United States. In my observation, those living in most Western European countries appear to be more content than Americans with the kind of commodities they already have, for example, not aspiring to own more TVs per household. Set aside whether that's virtuous. A promenade in the Jardin du Luxembourg, as opposed to a trip to Walmart for a flat-screen TV, won't help the European Union's GDP growth.

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Yet, Europe has one of the highest immigration rates globally, attracting disenfranchised and disenchanted young workers from around the world, often with a great work ethic and high levels of intelligence and qualifications. A trend only on the rise.

The first essential factor that is often overlooked: the enormous investment China is making in education. More educated workers are much more productive workers. (As I have reported elsewhere, U.S. data indicate that college-educated workers are three times as productive, and a high school graduate is 1.8 times as productive, as a worker with less than a ninth-grade education.) In China, high school and college enrollments are rising steeply due to significant state investment. In 1998, then-President Jiang Zemin called for a massive increase in enrollment in higher education. At the time, just 3.4 million students were enrolled in China's colleges and universities. The response was swift: Over the next four years, enrollment in higher education increased 165 percent, and the number of Chinese studying abroad rose 152 percent. Between 2000 and 2004, university enrollment continued to rise steeply, by about 50 percent. I forecast that China will be able to increase its high school enrollment rate to the neighborhood of 100 percent and the college rate to about 50 percent over the next generation, which would by itself add more than 6 percentage points to the country's annual economic growth rate. These targets for higher education are not out of reach. It should be remembered that several Western European countries saw college enrollment rates climb from about 25 to 50 percent in just the last two decades of the 20th century.

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China's enrollment in tertiary education is a case of too little too late. The facts speak for themselves. Despite a higher population, and decades of higher/advanced economic growth, China produced more engineering graduates than India only in 2007, and more PhD's only in 2009. With India's renewed focus on the educational sectore, and the massive opening up of education to foreign players post-the 2009 Congress election, that trend is expected to reverse.

Finally, people don't give enough credit to China's long-repressed consumerist tendencies. In many ways, China is the most capitalist country in the world right now. In the big Chinese cities, living standards and per capita income are at the level of countries the World Bank would deem "high middle income," already higher, for example, than that of the Czech Republic. In those cities there is already a high standard of living, and even alongside the vaunted Chinese propensity for saving, a clear and growing affinity for acquiring clothes, electronics, fast food, automobiles -- all a glimpse into China's future. Indeed, the government has made the judgment that increasing domestic consumption will be critical to China's economy, and a host of domestic policies now aim to increase Chinese consumers' appetite for acquisitions.

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China's long repressed "consumerist tendencies" are simply a result of their long repressive political system, that debilitated China's economy to the extent of dragging it backward two generations. As political economies grow, economic growth will peter out, as happened with the United States, as happened with Europe, as happened with East Asia and has happened with everyone before them, in line with the law of diminishing marginal returns and nominally exponential technology growth rates.

The cities' argument is inane. Even South Asia has cities indicative of high growth rates. Islamabad for example, claims a per capita GDP of $8,000, well within the range of most East European states. Not indicative of their general economic progress.

Cities, inherently, have a higher standard of living and a higher percapita GDP than most townships and rural areas, which tend to comprise the vast majority of stretches of the country. A case of stars in his eyes.

The second thing many underestimate when making projections for China's economy is the continued role of the rural sector. When we imagine the future, we tend to picture Shanghai high-rises and Guangdong factories, but changes afoot in the Chinese countryside have made it an underappreciated economic engine. In analyzing economic growth, it is useful to divide an economy into three sectors: agriculture, services, and industry. Over the quarter-century between 1978 and 2003, the growth of labor productivity in China has been high in each of these sectors, averaging about 6 percent annually. The level of output per worker has been much higher in industry and services, and those sectors have received the most analysis and attention. (I estimate that China's rapid urbanization, which shifts workers to industry and services, added 3 percentage points to the annual national growth rate.) However, productivity is increasing even for those who remain in rural areas. In 2009, about 55 percent of China's population, or 700 million people, still lived in the countryside. That large rural sector is responsible for about a third of Chinese economic growth today, and it will not disappear in the next 30 years.

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China's rural economy does face one serious and debilitating crisis. The role of local government’s corporate-like behaviour in managing local collectively-owned enterprises is often overlooked. These Township & Village enterprises are predicated on 'investments' from local residents, in the form of limited rural savings, often forcefully expropriated, without adequate or regular remuneration, unbeknownst to the principals at hand. Once the principals are made aware of their entitlement, the shit hits the fan.

Local govts. are also entitled to enterprise surpluses, which leads to another problem in the reallocation of surpluses, even while affording a degree of flexibility and power to local officials.

The many, many reasons -- from the financial crisis to the country's aging population to environmental limitations -- why Robert Fogel's forecast for China is completely inconceivable.

BY NICHOLAS CONSONERY | JANUARY 7, 2010

In his bombshell of a projection that China will produce $123 trillion in economic output by 2040, Robert Fogel conveniently dismisses any number of problems that threaten China's economic development, from environmental degradation to stalled political and economic reforms, by arguing that "Beijing has proven quite adept in tackling problems it has set out to address."

Past success is no guarantee of future results, and Fogel sets his entire analysis -- which implies an average annual growth rate of about 10.8 percent a year for more than 30 years -- on that shaky assumption, entirely overestimating the Chinese government's omniscience and its ability to overcome the country's enormous political, economic, and environmental challenges.

These problems on almost every level will prove far more threatening than Fogel suggests. First, the financial crisis has stalled the process of economic liberalization in China and strengthened the state's role in market outcomes. Over time, this will certainly create a range of inefficiencies that hinder future growth. Beijing's stimulus response -- originally deployed last year to compensate for the fallout in global demand for Chinese exports -- will probably have permanent repercussions. Already, industry revitalization and consolidation programs, coupled with a massive influx of easy credit, are stifling the private sector (aside from real estate, which could present its own downside growth risk) and encouraging production overcapacities in state-controlled, export-intensive, heavy industries like steel and cement. The Chinese renminbi's steadfast dollar peg since mid-2008 is giving even more incentive for export firms to over produce, which will inevitably perpetuate a reliance for growth on exports to consumers in America, Europe, and Japan -- with all the risks that come with that dependency.

The leadership now looks less willing than it has in decades to abandon its economic control. Beijing won't soon forget that China's restricted system allowed the government to quickly mobilize fiscal and credit resources to rescue growth and prevent social instability in the face of serious economic crisis. Meanwhile, the more liberalized U.S. economy, once a model for China, remains burdened with surging debt and double-digit unemployment. The free market has lost a bit of its luster.

This heavier reliance on a state-led approach will doubly skew China's growth potential by dampening innovation and reducing the returns expected on sizable education investments. It will be enormously difficult for China to move beyond manufacturing to become an innovator without genuine reform of a political and economic system that stifles individual expression and creativity and directs massive human and financial resources toward less-innovative, state-owned firms. Fogel's expectations for education's growth contribution, based on education and productivity data in the United States, may not fully transmit to China. After all, China's top college graduates are actively seeking jobs in either government or state-owned firms, for higher salaries and job security. That's good for the bureaucracy, but not so good for innovation and entrepreneurialism.

Fogel warns that Europe faces some serious demographic challenges. True enough, but as Fogel only briefly acknowledges, China has an aging population of its own to reckon with. Chinese statistics show that the country's birthrate fell 42 percent from 1990 to 2007, and government projections suggest that by 2025, nearly a quarter of China's population will have celebrated its 60th birthday. Not surprisingly, Beijing is already considering ways to strengthen the country's inadequate social safety net, but this process carries its own policy risks and the country's fragmented pension system won't be fixed so easily. Local governments that operate their own social security funds will resist a push to centralize the effort, and the amount of capital needed from the central government to make benefits meaningful will meet fierce resistance from deficit hawks within China's Finance Ministry. If the leadership falls short in caring for the elderly (efforts to date have certainly been inadequate) this population will present a much larger than expected drag on economic growth.

But the most important reason why we won't see 1.4 billion Chinese earning an average of $85,000 per year is simply that the Earth can't sustain such rapid growth. Today, just 4 percent of China's people own their own automobile. Now multiply that number by 20 and imagine the environmental stresses China would have to manage as a result of such an increase -- not to mention the impact of price spikes for the traditional resources that will remain principal components in the energy mix for at least the next 20 years. Fogel's forecast seriously underestimates these problems.

The biggest environmental challenge for China's leadership will be in securing enough water to keep the economy afloat. Fogel predicts that the agricultural sector, China's heaviest water consumer by far, will remain an "underappreciated economic engine" for growth. But Beijing already faces water scarcity, and industrial growth plus urbanization will mean increasing demand on China's already-inadequate water resources. The Water Resources Group, coordinated by McKinsey & Company, recently forecast that without significant policy changes, China will face a 25 percent supply gap for expected water demand by 2030. This is an expectation of what will happen, not an outside possibility.

Beijing's capacity to cope with the complex issues tied to continued growth is anything but assured. It will face insurmountable difficulties, for example, in forcing local-level bureaucracies and companies to adhere to central-level environmental and economic policies. History suggests a far more pessimistic outlook: Despite the 20 years that have passed since Beijing mandated that local governments incorporate water environmental protection into their production and construction plans, and the numerous iterations of that policy since, China's Ministry of Environmental Protection's own data clearly shows a more than 34 percent increase in wastewater emission from 2000 to 2007 alone (a primary driver of water pollution). Nearly two-thirds of the population now believes that water pollution is China's most pressing environmental threat.

Is the world ready for the China that Fogel describes? A better question: Is China?

Robert Fogel is a Nobel laureate in economics and is professor at the University of Chicago. His forecasts hold considerable weight, and doesn't seem likely that he's been "paid" off like you suggest BR.

Chinese consumerism is indeed taking off now that the generation born in in the 1980's are beginning to earn and manage their own income. China is the SECOND largest luxury market after Japan.

" In 2007, Chinese consumers spent more than US$8.0 million on luxury products. It is further estimated that China is poised to becoming the largest luxury market in the world in 2015, accounting for 32.0% of the global market."China Consumer: The Chinese Consumerism

"Unlike Japan in the 1980s and 1990s, China has a culture of consumerism. What does that mean? In essence, the Chinese are like Americans in that they have a seemingly endless appetite for stuff. They also have an extremely large internal market, which is only starting to be developed.

Regarding the illiteracy rate, Armand, a rise in illiteracy from 87 million to 116 million is unfortunate, the affected population is hardly the target group Professor Fogel is referring to that will change China.

"he number of undergraduate and graduate students in China has been growing at approximately 30% per year since 1999, and the number of graduates at all levels of higher education in China has approximately quadrupled in the last six years."

Here is my question to all the Chinese economic cheerleaders like Koji and Badguy and even other Indian guys like Rage who have studied the Chinese economy in detail.

Lets assume for a minute, that this $123 trillion figure is not something that this FP writer pulled out of his ass !!
Lets just give him the benefit of the doubt.

I am no economist and it wasnt my speciality....so please indulge me in my ruminations.

If China is going to be a $123 Trillion economy or $10K USD per household economy, then I am assuming that that average $10K per household guy is not going to want to work in some cheap factory like a slave assembling Iphones at $2 per hour.

Assuming that this is a true statement, then all of China's cheap high-volume export industries will have to be replaced by high-tech industries that produce value added goods.

Now, not only do they have to have high-tech industries but they would have to literally dominate, or be a close 2nd in virtually every sector of high-tech and finance. The domination is necessary otherwise their high-tech sector will not provide the margins necessary to drive the economy ?? China does not have any significant raw material deposits like Russia that will drive the economy ?

I am also assuming that by 2020 almost 40% of China population will be over 60 y/o, and that domestic consumption alone will not create a $123 Trillion dollar economy !!

This means that the next Google, Microsoft, Apple, Oracle, Genentech, Boeing, Cisco, Intel, Exxon, IBM, Toyota, BMW, etc, etc would have to come from China.

They may be able to do it in finance, but I have yet to see any proof that the Chinese high tech sector has produced any world-beaters anywhere in that landscape other than low-cost manufacturing.

So all you China experts, please explain to me again how China is going to do all this in the next 10 years.

Tell me - are my assumptions wrong.

(Again....my premise here is that China will never make the $123 Trillion unless they dominate virtually every bit of the technology and finance sector like the US did for most of the last 70 years. Is that premise wrong ?? )

Germany does not have any significant piles of natural resources, and yet it dominates in heavy industrial exports. It's possible that this is one area that China can grow in as it export portfolio expands. It already is the world's largest steel producer, but hasn't had the opportunity to sell offshores simply b/c domestic demand is sky high.

The thing with China is that it's not just the cheap labor (cheaper can be found in MANY countries in the world). China is attractive for manufacturing b/c it has an established infrastructure that allows for high volume and quick transportation. So while wages increase in China, it'll still be better to put up a factory there and deal with high volumes versus a country where to you have to pay a fortune to transport anything on time.

Germany does not have any significant piles of natural resources, and yet it dominates in heavy industrial exports. It's possible that this is one area that China can grow in as it export portfolio expands. It already is the world's largest steel producer, but hasn't had the opportunity to sell offshores simply b/c domestic demand is sky high.

The thing with China is that it's not just the cheap labor (cheaper can be found in MANY countries in the world). China is attractive for manufacturing b/c it has an established infrastructure that allows for high volume and quick transportation. So while wages increase in China, it'll still be better to put up a factory there and deal with high volumes versus a country where to you have to pay a fortune to transport anything on time.

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Since you dont want the answer the question posed directly....let me put it to you another way.

Yes....Germany dominates in heavy industrial, high performance automobiles, certain sector of pharma, and even high sophisticated test and measurement industry. So all that has translated into Germany being a powerhouse economy in Europe. There are plenty of German companies that totally dominate their sector - SAP, BMW, Rohde & Swartch, etc, etc.

My question, Koji - Name me one local Chinese tech company that completely dominates in its sector. - Just give me one name ??

You made an interesting comment that it is not simply low-cost but the excellent infrastructure and supply chain that draws people to China. I totally agree.

My question - Even if China can hold onto to high volume manufacturing while wages rise; do you think that China can attain a $123 trillion economy by just building products designed in the US and Europe ??

Since you dont want the answer the question posed directly....let me put it to you another way.

Yes....Germany dominates in heavy industrial, high performance automobiles, certain sector of pharma, and even high sophisticated test and measurement industry. So all that has translated into Germany being a powerhouse economy in Europe. There are plenty of German companies that totally dominate their sector - SAP, BMW, Rohde & Swartch, etc, etc.

My question, Koji - Name me one local Chinese tech company that completely dominates in its sector. - Just give me one name ??

You made an interesting comment that it is not simply low-cost but the excellent infrastructure and supply chain that draws people to China. I totally agree.

My question - Even if China can hold onto to high volume manufacturing while wages rise; do you think that China can attain a $123 trillion economy by just building products designed in the US and Europe ??

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Eventually the transition will occur or else China's growth will be unsustainable. You don't think the Chinese leadership doesn't recognize this? Hence they're pouring money into education, and already there has already been limited return (e.g. # of PhDs). Looking a historical precedent is helpful too: Japan, Taiwan, and SK all produced cheap goods. No one seems to remember that 20 years ago, all those Happy Meal toys from McDonalds had a "Made in Taiwan" stamp.

If we're talking about "tech" companies, I can see Huawei as an example.

"Huawei's global contract sales for 2006 reached 11 billion USD (a 34% increase from 2005), 65% of which comes from overseas market. Huawei has now become a leading vendor in the industry and one of the few vendors in the world to provide end-to-end 3G solutions."

"In December 2008, BusinessWeek magazine puts Huawei at number 3 after Apple and Google in their first annual list of 'The World's Most Influential Companies' in collaboration with an advisory board of 14 academics, consultants, and industry leaders worldwide, including Shelly Lazarus, Chairman and CEO of Ogilvy & Mather Worldwide and Jim Collins, author of Good to Great"

"In January 2009, a United Nations agency reported Huawei was the world's top international patent seeker in 2008, which ended the almost one decade of domination by Netherlands' Philips Electronics as the first place on the list of applicants for World Intellectual Property Organization (WIPO) patent protection.[31]"

Lenovo's technology is owned by China now, and what proof do you have of Huawei's products being Cisco knockoffs? If they're doing that, they wouldn't be spending 10% of their revenues on R&D would they? They wouldn't be #3 in the world in patents would they?

Eventually the transition will occur or else China's growth will be unsustainable. You don't think the Chinese leadership doesn't recognize this? Hence they're pouring money into education, and already there has already been limited return (e.g. # of PhDs).

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A Chinese PhD isn't worth the paper its printed on unless its from one of the four flagship unis.

Looking a historical precedent is helpful too: Japan, Taiwan, and SK all produced cheap goods. No one seems to remember that 20 years ago, all those Happy Meal toys from McDonalds had a "Made in Taiwan" stamp.

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They also had high consumer spending on their economic ascent. Even now with their high savings rate, Japan still has three times the percentage higher than China in percentage of consumer spending as part of GDP. It was those growth years of the domestic market in the 60-80s that formed the backbone of the economy. When exports collapsed in the 90s, it was the only thing that saved them from their overambitous expansion.

If we're talking about "tech" companies, I can see Huawei as an example.

"Huawei's global contract sales for 2006 reached 11 billion USD (a 34% increase from 2005), 65% of which comes from overseas market. Huawei has now become a leading vendor in the industry and one of the few vendors in the world to provide end-to-end 3G solutions."

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You mean the same Huawei that copied Cisco's manual word for word for the routers and switchers they pirated? You mean the same Huawei that gets straight technological infusion from technologies they bought for the military to copy? You mean the same Huawei that relies on government subsidies to draw a profit? The number of contracts doesn't mean much when CCP still has to foot a bill. Huawei nets a profit of about a billion a year, they draw about $4 billion worth of subsidies. What is the point of being in business if it runs in the red for the state?

"In December 2008, BusinessWeek magazine puts Huawei at number 3 after Apple and Google in their first annual list of 'The World's Most Influential Companies' in collaboration with an advisory board of 14 academics, consultants, and industry leaders worldwide, including Shelly Lazarus, Chairman and CEO of Ogilvy & Mather Worldwide and Jim Collins, author of Good to Great"

Lenovo counts as well doesn't it? It is a Chinese company now.
I mean..these companies don't DOMINATE their fields...but neither do the German firms you listed.

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Lenovo sells laptops with American processors, graphics cards, motherboards, they are doing them a bigger favour. They can't even make a decent laptop battery with recalls every year for the last four on six different models.

Lenovo's technology is owned by China now, and what proof do you have of Huawei's products being Cisco knockoffs? If they're doing that, they wouldn't be spending 10% of their revenues on R&D would they? They wouldn't be #3 in the world in patents would they?

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I dont want to turn this into a Huawei thread, but since you brought it up.
Huawei does not have a single high-end router that competes with Cisco, Juniper networks, etc.

Huawei does sell a lot of low-end low-margin products, many of which are Cisco knock-offs.
And they certainly have a lot of volume since their products are probably cheaper than equivalent Cisco products. They have even copied the Cisco software, line for line including the dcumentation with mistakes in it.

As far patents goes....numbers dont mean much. If you work in tech today, you will know all companies are trying to patent even the most ridiculous things. Its the quality of the patent that counts. Huawei may eventually close the gap with Cisco, Juniper, etc but it will take some time and those guys are not standing still.

If Huawei and Lenovo is all you can come up with, then I rest my case - there isnt a single local Chinese high-tech entity that dominates its field today.

My point is I just dont see China getting there in 10 or even 20 years to being a world-beater. Maybe in 40 years, but even then its not like Europe and the US are going to be sitting on their ass piddling with their thumbs, while you guys are busy catching up.

Huawei no longer sells the products that have the copied user manuel after reaching a settlement with Cisco, and yet it still manages to receive 70% of its profits from overseas. Plus the copying you are referring to dates back to 2003! It is extremely dated news.
"Signaling movement toward a settlement, networking equipment giant Cisco Systems Inc. agreed yesterday to temporarily halt its lawsuit accusing China's Huawei Technologies Co. of copying Cisco's proprietary technology.

As part of the agreement to stay the litigation for six months, Huawei will abide by a preliminary injunction barring it from distributing routers and other switching products that copy Cisco's equipment."

Claiming that China "fudges" numbers is just a cheap argument that has no validity. Don't resort to "fudging" just b/c you can't find numbers to support your argument.

I searched high and low for the $4 billion subsidy you are referring to, and I can't find it. Please provide me a link. Also, even if they are getting subsidy, it's no special circumstance. Your beloved Airbus lives on European subsidies.

Robert Fogel is a Nobel laureate in economics and is professor at the University of Chicago. His forecasts hold considerable weight, and doesn't seem likely that he's been "paid" off like you suggest BR.

Chinese consumerism is indeed taking off now that the generation born in in the 1980's are beginning to earn and manage their own income. China is the SECOND largest luxury market after Japan.

" In 2007, Chinese consumers spent more than US$8.0 million on luxury products. It is further estimated that China is poised to becoming the largest luxury market in the world in 2015, accounting for 32.0% of the global market."China Consumer: The Chinese Consumerism

"Unlike Japan in the 1980s and 1990s, China has a culture of consumerism. What does that mean? In essence, the Chinese are like Americans in that they have a seemingly endless appetite for stuff. They also have an extremely large internal market, which is only starting to be developed.

Regarding the illiteracy rate, Armand, a rise in illiteracy from 87 million to 116 million is unfortunate, the affected population is hardly the target group Professor Fogel is referring to that will change China.

"he number of undergraduate and graduate students in China has been growing at approximately 30% per year since 1999, and the number of graduates at all levels of higher education in China has approximately quadrupled in the last six years."

Here is my question to all the Chinese economic cheerleaders like Koji and Badguy and even other Indian guys like Rage who have studied the Chinese economy in detail.

Lets assume for a minute, that this $123 trillion figure is not something that this FP writer pulled out of his ass !!
Lets just give him the benefit of the doubt.

I am no economist and it wasnt my speciality....so please indulge me in my ruminations.

If China is going to be a $123 Trillion economy or $10K USD per household economy, then I am assuming that that average $10K per household guy is not going to want to work in some cheap factory like a slave assembling Iphones at $2 per hour.

Assuming that this is a true statement, then all of China's cheap high-volume export industries will have to be replaced by high-tech industries that produce value added goods.

Now, not only do they have to have high-tech industries but they would have to literally dominate, or be a close 2nd in virtually every sector of high-tech and finance. The domination is necessary otherwise their high-tech sector will not provide the margins necessary to drive the economy ?? China does not have any significant raw material deposits like Russia that will drive the economy ?

I am also assuming that by 2020 almost 40% of China population will be over 60 y/o, and that domestic consumption alone will not create a $123 Trillion dollar economy !!

This means that the next Google, Microsoft, Apple, Oracle, Genentech, Boeing, Cisco, Intel, Exxon, IBM, Toyota, BMW, etc, etc would have to come from China.

They may be able to do it in finance, but I have yet to see any proof that the Chinese high tech sector has produced any world-beaters anywhere in that landscape other than low-cost manufacturing.

So all you China experts, please explain to me again how China is going to do all this in the next 10 years.

Tell me - are my assumptions wrong.

(Again....my premise here is that China will never make the $123 Trillion unless they dominate virtually every bit of the technology and finance sector like the US did for most of the last 70 years. Is that premise wrong ?? )

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Yeh, you're on the right course. To put this very simplistically: As China's economy grows, and wages continue to rise, its comparative advantage will shift away from the manufacture of low-cost goods to higher-end goods and goods requiring greater capital investment. That is inevitable. Even in the 1980's and 1990's, when chinese infrastructure was nowhere compared to manufacturers like Japan or Taiwan or South Korea, manufacture shifted away from these countries to lower-cost countries like China (cost is relative here, for it includes both labour costs as well as the costs of shifting manufacture and transient costs of infrastructure). That is the natural course of economics. In analyses of investments, and where to invest, the two most-used measures for evaluating a location and an investment are- the net present value (NPV) and the internal rate of return (IRR): the net present value is the value of an income stream in sum from a future set of annuities. Each future income amount in the stream is discounted, meaning that it is divided by a receivable rate of return representative of the opportunity cost of holding capital from year 0 until the year when income is received or the outgo is spent: in other words, the growth rate forfeited from investing in an alternative series of investments or annuities. As the growth rate of India eventually catches upto and overtakes China in the medium run because of a poorer income base, and the expanding infrastructural sector in India- mitigating variable and transfer costs; as the labour sector gets increasingly formalized and tertiary sector education expands; as productivity increases with greater capital and technology infusion, bridging the gap between per capita labour outputs in both countries- evinced by a higher India : China FDI ratio than ever before- USD 17.8 billion in the first half of our financial year: Apr-Oct 2009, as against China's USD $43 billion in the first half of their financial: Jan-June 2009, up from a ratio of about $4 billion against $47 billion in 2001 (See: India pips China in R&D stakes), the opportunity cost of investment in low-quality manufacture in China will widen, shifting the base of production to the next high-demographic, low-cost, low-developed destination: India. At which point, China will be like the next USA, with high-consumption, (relative high-technology, low-growth patterns and India will be like the next, 'rising' China, with (relatively) low-cost, medium-high consumption (due to the existence of an extant high-consumption 'middle class') and low-technology manufacture, albeit with a significantly "attenuated" technological & economic divide, because of India's 'prematurely' developed information technology & services sector. The same cycle will repeat itself in India in the subsequent generation.

A minor note: Robert Foegel is a winner of the 1993 Nobel Memorial Prize in Economic Sciences, and is greatly respected. However, he is also known for his advocacy of cliometrics, a highly imprecise and speculative science that uses econometrics and mathematical models to study economic and social history, and sometimes fatuous, particularly with respect to future projections. It is also known for being a notoriously narrow science, controversial for their suitability to often incomplete historical data, and circumspect, particularly in respect of neglecting political considerations and demographic & geo-spatial models, that also endogenously & considerably impact growth. I would be much more conservative in making such wild predictions. Especially Given the time frame, symptomatic growth and China's recent geo-strategic reversals in the area.

Chinese consumerism is indeed taking off now that the generation born in in the 1980's are beginning to earn and manage their own income. China is the SECOND largest luxury market after Japan.

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What do you mean by taking off? Chinese consumer spending as part of GDP has seen a continous drop over the last 10 years.

" In 2007, Chinese consumers spent more than US$8.0 million on luxury products. It is further estimated that China is poised to becoming the largest luxury market in the world in 2015, accounting for 32.0% of the global market."China Consumer: The Chinese Consumerism

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$8 million?? The rich guy down the pier owns a yacht worth more than that.

"Unlike Japan in the 1980s and 1990s, China has a culture of consumerism. What does that mean? In essence, the Chinese are like Americans in that they have a seemingly endless appetite for stuff. They also have an extremely large internal market, which is only starting to be developed.

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China has grown a culture of saving their money since they have no social security, no healthcare , no access to quality public education, and cheap pensions. The state has failed to take care of these public needs that they have to care for themselves..

Regarding the illiteracy rate, Armand, a rise in illiteracy from 87 million to 116 million is unfortunate, the affected population is hardly the target group Professor Fogel is referring to that will change China.

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If 116 million of the population isn't a target group, then CCP is failing.

"he number of undergraduate and graduate students in China has been growing at approximately 30% per year since 1999, and the number of graduates at all levels of higher education in China has approximately quadrupled in the last six years."

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What good is pumping millions through school if they pass regardless of learning?

Yeah, Hong Kong higher education really isn't China. The only Chinese unis that made the list are the flagships I told you about, they say "China" next to it.

Chinese education is like a factory line, they have a set goal of how many students will recieve what and that is it. There is no quality control in the system except participation, you show up, you pass. Chinese education is based on memorisation and cheating, no indepdendent thought. Only exception are the flagships that have all the money and liberal instruction policy. A Chinese PhD, outside the flagships, is about the equivalent to a Western bachelors degree. A bachelors the equivalent of a primary school completion. There is a reason Chinese students flock to the West to attain degrees, because their schools are substandard.

In 2040, the Chinese economy will reach $123 trillion, ornearly three times the economic output of the entire globe in 2000. China's percapita income will hit $85,000, more than double the forecast for the EuropeanUnion, and also much higher than that of India and Japan. In other words, theaverage Chinese megacity dweller will be living twice as well as the averageFrenchman when China goes from a poor country in 2000 to a superrich country in2040. Although it will not have overtaken the United States in per capitawealth, according to my forecasts, China's share of global GDP -- 40 percent -- willdwarf that of the United States (14 percent) and the European Union (5 percent)30 years from now. This is what economic hegemony will look like.

Most accounts of China's economic ascent offer little butvague or threatening generalities, and they usually grossly underestimate theextent of the rise -- and how fast it's coming. (For instance, a recent study bythe Carnegie Endowment for International Peace predicts that by 2050, China'seconomy will be just 20 percent larger than that of the United States.) Suchaccounts fail to fully credit the forces at work behind China's recent successor understand how those trends will shape the future. Even China's own economicdata in some ways actually underestimate economic outputs.

It's the same story with the relative decline of a Europeplagued by falling fertility as its era of global economic clout finally ends.Here, too, the trajectory will be more sudden and stark than most reportingsuggests. Europe's low birthrate and its muted consumerism mean itscontribution to global GDP will tumble to a quarter of its current share within30 years. At that point, the economy of the 15 earliest EU countries combinedwill be an eighth the size of China's.

This is what the future will look like in a generation. It'scoming sooner than we think.

What, precisely, does China have going so right for it?

The first essential factor that is often overlooked: theenormous investment China is making in education. More educated workers aremuch more productive workers. (As I have reported elsewhere, U.S. data indicatethat college-educated workers are three times as productive, and a high schoolgraduate is 1.8 times as productive, as a worker with less than a ninth-gradeeducation.) In China, high school and college enrollments are rising steeplydue to significant state investment. In 1998, then-President Jiang Zemin calledfor a massive increase in enrollment in higher education. At the time, just 3.4million students were enrolled in China's colleges and universities. Theresponse was swift: Over the next four years, enrollment in higher educationincreased 165 percent, and the number of Chinese studying abroad rose 152percent. Between 2000 and 2004, university enrollment continued to risesteeply, by about 50 percent. I forecast that China will be able to increaseits high school enrollment rate to the neighborhood of 100 percent and thecollege rate to about 50 percent over the next generation, which would byitself add more than 6 percentage points to the country's annual economicgrowth rate. These targets for higher education are not out of reach. It shouldbe remembered that several Western European countries saw college enrollment ratesclimb from about 25 to 50 percent in just the last two decades of the 20thcentury.